Cost gap between full-service, budget airlines narrows

The gap between the cost of running a low-cost airline (LCC) and a full-service carrier (FSC) is being narrowed, as the latter take to strategic ways to cut costs.

The cost available per seat km (CASK) of an FSC, which used to be Rs 4.60 compared with Rs 2.40 of their low-cost counterpart, has fallen to Rs 3.02, only 25 per cent more than the latter.

CASK is got by dividing operating costs by available seat per km and tells the actual cost of running an airline. The lower the CASK, the more profitable the airline.

“Our CASK is just 60 paise less than the low-cost carriers and we are working to bring it down further,” said Saroj Datta, executive director, Jet Airways.

“We are constantly reducing our cost structure through various ways. Also, more people are travelling because of the increase in capacity,” said a source in Kingfisher Airlines.

An analysis of the second quarter results of Jet Airways and Kingfisher bears this out. Jet Airways has brought its overall cost down by 31 per cent to Rs 2,516 crore from Rs 3,681 crore during the same period last year. The fuel bill has come down 53 per cent to Rs 780 crore, employee cost has been brought down 15 per cent to Rs 301 crore and other operating costs brought down by 24.4 per cent to Rs 746 crore.

“We are doing all to save costs. Major cost-cutting has come from savings from catering and reservation charges. Employee cost has also come down,” said a senior Jet Airways official.

Vijay Mallya-run Kingfisher Airlines has reduced its employee cost and fuel bill. In the second quarter, it has brought down its costs by 22 per cent, from Rs 1,908 crore to Rs 1,483 crore. They have brought down fuel cost by 44 per cent to Rs 460 crore, and employee cost is down by 17.7 per cent to Rs 172 crore.

“We are trying to save wherever we can. Employee costs have come down, as a few people have left the organisation,” said a senior Kingfisher Airlines official. A few aircraft of the airline are also grounded due to unavailability of spare parts.

Jet Airways and Kingfisher Airlines have shifted over half of their capacity to low cost in the past one year, increasing the total low-cost capacity to over 70 per cent. This has created a lot of pressure on the existing LCCs.

“The conversion of full-service carriers to low cost is creating a pressure. Every time a full-service carriers converts an aircraft into single class for low-cost operations it adds capacity into the system, thus creating pressure on the LCCs,” said Kapil Kaul, India head of the Centre for Asia Pacific Aviation.

“There will be some impact, as people will tend to move to airlines carved out of full-service carriers. But that is negligible as of now,” said Rajeev B Batra, executive director, KPMG, a financial consultancy.

“Our shift to low cost adds more capacity in the system and that has created pressure on the LCCs. We are also seeing passengers shift towards our low-cost subsidiary,” said Datta. And with losses of the airlines going up when compared with the first quarter of this financial year, analysts are wondering whether the shift to an LCC model is enough to bring a turnaround in the industry.